The US is a leading technology innovator and exporter. But a number of new trade restrictions have been implemented across the globe since 2020, making it more challenging than ever to ship out hardware. In fact, the IMF explains that the number of trade barriers put in place annually has tripled since 2019.
Naturally, this affects both the import and export of products. On top of this, many businesses underutilize possible tax incentives. As such, if your company trades in tech hardware, a tax strategy is essential to your bottom line.
In this blog, we’ll help you understand how best to structure your tax strategy, to avoid the pitfalls associated with importing and exporting tech hardware.
Basics of Taxation in Global Trade
No matter what products a business trades across international borders, there are a number of factors to keep in mind. We’ll briefly mention a few of the important ones below, and how they might affect your business.
Customs duties
Customs duties are a tariffs or taxes imposed on goods transported across international borders. Governments levy these tariffs to protect their economies, environments, and local jobs. Essentially, they help control the flow of products into and from a country.
For imports, there is a specific amount charged for any goods coming into a country. This is either a flat rate, or a percentage of the value of the item. It’s calculated according to the Harmonized Tariff System (HTS), which has a corresponding duty rate for every item. This system lists every single product that can be brought into the US, and is specific down to the ingredient level. So depending on the tech hardware you trade, this might mean you’ll pay different rates for different products.
As for exports, very few countries impose duties on products leaving the country. The exception includes certain high-value or sensitive goods, and some raw materials. As such, export duties are unlikely to affect your business if you ship tech hardware. However, your products may be subject to export controls due to national security concerns. For instance, encryption technology or advanced semiconductors may require specific export licenses.
VAT and GST
Value-added tax (VAT) and goods and services tax (GST) are consumption taxes levied against goods and services at each stage of production. While they are not common at the US federal level, they are used in 140 other countries, including India and China. So if you’re sourcing your products internationally, you will need to register for VAT/GST in that country.
But there is an upside. Because the US does not levy these taxes, any tech hardware you export is considered zero-rated in most jurisdictions. This means that you can recover the VAT/GST paid on any products your company used to produce these exported goods.
The Role of Tax Treaties and Agreements
Because global taxation can lead to increased costs for international trade, many countries have entered into treaties or agreements to prevent excessive or double taxation that could stifle trade or investment. In fact, the US currently has tax treaties and free trade agreements (FTAs) in place with over 20 different countries.
International agreements like FTAs help different jurisdictions agree on trade barriers, tax policies, and fair competition. FTAs usually work by lowering or totally doing away with customs duties between member countries. That way, it’s possible to move, release, and clear merchandise across borders without excessive spending.
Leveraging trade agreements
Having a strategy in place for trade agreements can help you recover production costs, and maximize profits.
For example, the US Customs and Border Protection has provisions specific to electronic products moving across the country’s borders. This includes that if these products contain components produced within the US, they may be eligible for a reduced tariff.
By ensuring that your hardware meets these rules of origin requirements, you could save a lot of money during exports. All you need are the certificates of origin to prove that your goods qualify.
It’s also worth investigating whether the countries you conduct business with have export subsidies. These include grants or tax credits for research and development, and are particularly relevant to the tech industry.
Special Economic Zones (SEZs)
Another aspect to consider is special economic zones. SEZs are areas within a country that provide tax benefits through incentives to attract foreign investment and boost economic activity. Generally, they offer lower tax rates or holidays, duty exemptions, or other support.
For example, the Shenzhen SEZ in China gives preferential tax rates to tech companies. So if you need to import hardware from China, you could do so at a lower tax rate. It also offers exemptions on import duties for raw materials, components, and equipment.
Depending on the SEZ, there may be zone-specific regulations with which your business must be compliant. As such, working in these areas will mean you’ll need to keep detailed and accurate records, especially in the event of a tax audit.
Managing Import Licenses and Compliance
Did you know that not all imports and exports require a license? However, some tech products like cryptographic technology or defense technology products require special licenses to be imported. More information about these licenses can be acquired from the country with which you’re trading, or the Federal Communications Commission (FCC).
This agency can also advise you on the relevant documentation and filing processes to ensure that all your transactions are compliant with the relevant regulations.
Transfer Pricing Considerations
For businesses that have different branches or related entities across international borders, trade works somewhat differently. Instead of imports and exports of tech hardware, your company will make use of transfer pricing strategies. Essentially, this involves a multinational enterprise (MNE) setting prices for transactions like sales of goods or services between related entities. In the tech industry, this could include finished products, components, research and development services, and intellectual property licensing.
Transfer pricing is usually based on the Arm’s Length Principle, developed by The Organization for Economic Co-operation and Development (OECD). It states that your business should charge the same transaction prices with related entities as it would with third-party buyers in the same circumstances.
Keep in mind that these transactions affect how your profits are allocated across different jurisdictions. As such, transfer pricing can directly impact your tax liabilities and compliance, especially considering that each country has its own rules and requirements.
Compliance with international guidelines
Compliance with transfer pricing regulations is essential. Failing to comply can result in penalties, double taxation, and disputes with the tax man. OECD Guidelines and local regulations are in place to provide a framework for establishing compliant practices.
However, this means that if your business participates in intercompany trade, you’ll need to keep detailed documentation to support transfer pricing policies and demonstrate your compliance. This includes a master file for all pricing policies, and local files with detailed information on specific intercompany transactions within each country. These should accompany a country-by-country report summarizing how all income from these transactions is allocated, as well as the relevant taxes paid.
Risk Management and Compliance
As with any industry, international trade comes with risks – from changing economic conditions to fluctuating exchange rates. And the same is true for international taxation. Your tax strategy should always include a documented policy that addresses tax risk.
This starts with identifying potential risks. For example, changes to tax laws, or transfer pricing adjustments could affect your compliance. And if your business is subject to double taxation or currency fluctuations, this poses a significant financial risk.
The best way to mitigate potential risk is by being proactive. This means staying on top of changing laws and regulations, and ensuring that your financial management is always a priority. One way to ensure this is to consult experts.
With a tax professional or expert outsourced controller, you can ensure that your financial management aligns with best practices, to prevent your business from setting off potential red flags.
To find out how your business can start a proactive tax planning strategy, or for help navigating international trade, schedule a Discovery Call with one of our CPAs.
The information presented in this blog article is provided for informational purposes only. The information does not constitute legal, accounting, tax advice, or other professional services. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Use the information at your own risk. We disclaim all liability for any actions taken or not taken based on the contents of this blog. The use or interpretation of this information is solely at your discretion. For full guidance, consult with qualified professionals in the relevant fields.
